James Tobin’s Big Idea Is Back, Again

The years of financial crisis presented Western leaders with a dilemma.

Widespread public perception that the whole mess had its roots in the dealing rooms of major banks forced them to turn on the financiers with whom they’d been gleefully schmoozing for years. Recall U.K. Prime Minister Gordon Brown‘s gushing 2004 paean to the innovation and perspicacity of Lehman Brothers as he declared its new London HQ open.

The political class was forced to go along with this version of events, not least because it glossed over a less palatable alternative tale, that it had been asleep at the regulatory wheel. Politicians may not like ‘banker bashing’ as we call it in the U.K. They know as well as anyone how the West really earns what little it still does. But, still, they’ll take it over politician bashing any day.

So, sure enough, the idea of a Tobin Tax raised its head after 2009′s London summit of major industrial players. German Chancellor Angela Merkel and then French President Nicolas Sarkozy both threw their weight behind such a tax that year, even though the Anglo-Saxon leaders were always less keen. Named after Nobel economics laureate James Tobin, it’s essentially a levy on financial transactions and it’s easy to see why the politicos like it nowadays. The tax not only clips the bankers’ wings, and is clearly seen to do so, it raises fortunes for national treasuries too, and can be focused on those tricky derivatives markets many distrust but few understand. Win win win.

But there’s a problem. Unilateral Tobin taxes end financial chicanery in much the same way chemotherapy treats cancer. They both take out the healthy tissue too. Vastly profitable financial intermediation will just move to jurisdictions which don’t have them. Despite the G20′s show of post-crisis unity, when it came to a Tobin Tax the rubric remained “Of course. After you…”

So there the whole idea foundered. Other matters, most notably the euro zone’s existential crisis, took the top spot and a global Tobin tax was duly placed in the ‘just too hard’ pile.

However, Mr. Tobin’s big idea is still with us, making headlines in the European Union and South Korea, albeit for different reasons. The Koreans are caught up in Asia’s undeclared competitive currency devaluation, with the won facing upward pressure thanks to Tokyo’s yen-bashing monetary policies. As Japan’s key export rival, South Korea would dearly like to stop all those nasty speculators from betting on it to lose a currency war. For the moment, it seems to be shying away from imposing a tax, but has considered it, and keeps the option on the table.

The European Commission is going further, however, and wants to press ahead with an EU-wide tax on secondary-market bond, equity and derivatives transactions, which it called for in 2011. However, at present it seems that only 11 out of 17 euro-zone countries intend to apply the tax, and that the largest financial center in Europe, London, will be outside it, too, as the U.K. has no intention of joining in.

This seems a straight recipe for the movement of financial business from countries which apply the tax to countries which don’t. At present, the plan seems to be that the tax will be levied on any bank registered in a country that does apply the tax, even if the transaction takes place in a country that doesn’t. Given the U.K.’s position as the trading center for hundreds of banks domiciled elsewhere, it’s easy to see why another former Prime Minister, John Major, was moved to call the proposed rules a “heat-seeking missile aimed at the City of London.”

There’s a fight coming, but perhaps European regulators should look at the Eurobond market, now worth nearly four trillion dollars every year. It emerged after U.S. President John Kennedy imposed a tax on investing in foreign securities. Now it’s the biggest forum for corporate fixed-income transactions.

In that light, it’s very hard to see a Europe-only Tobin Tax as anything other than a heaven-sent opportunity for Dubai and Singapore if the U.K. is forced to introduce the tax by EU-wide legislation.

Comments (1 of 1)

The politicians escaped this pretty much unscathed because they blamed the recession on the free market system. They got away with it even though it was the politicians themselves who caused this problem. They got away with it because they were the ones who had the megaphone, and the media simply nodded in agreement. People would do well to remember that it's usually the guy who does the most finger pointing who is actually the biggest culprit.